An inquiry into the national council of ELWa, the &#xA3;500m-a-year education and training body, revealed "fundamen-tal breakdown" in spending controls.

The Auditor General for Wales Sir John Bourn said: "Taken together, these audit findings demonstrate a serious and fundamental breakdown in the controls that should have been operated by the National Council.

"It is not acceptable that public business was conducted in this way and that the interests of the people of Wales were not better protected."

Since the investigation began, the chair of ELWa Enid Rowlands announced she was standing down, and former chief executive Steve Martin is also to quit.

The spotlight fell on a &#xA3;4m grant awarded to a Pop Caf&#xE9; in the Rhondda which demonstrated "major failings" in ELWa involvement, the National Audit Office found.

More "serious weaknesses" were identified in an analysis of the other 17 projects within the National Council's &#xA3;12m Innovation Development Fund programme for 2001-02.

"A recent review by the National Council of its other live projects found similar management deficiencies in a wide range of them and a programme of corrective action is now in hand."

Learn to Live Ltd, a subsidiary of the Avanti Media Group, was established to manage the Pop Centre MP3 Caf&#xE9; project to create a new media and information technology centre in Porth, Rhondda.

The scheme was to provide interactive e-learning opportunities for young people from deprived backgrounds.

But the financial checks applied during the Pop Caf&#xE9; application and approval process were labelled "inade-quate" and contravened the ELWa national council's guidelines.

"The National Council failed to specify clearly what it should get for its money, and concerns raised by the then chief executive were not addressed by officials before the contract was signed," the NAO said.

The National Council paid its &#xA3;4m contribution to the project in March 2002, in part to minimise its projected underspend for the 2001-02 financial year.

"There is no evidence the value for money case for an advance payment was considered by National Council officials," the NAO said.

Sir John found that nearly half of the funding had clearly been paid in advance of need.

At the National Council - ELWa's request, Learn to Live Ltd had repaid &#xA3;1.67m of the &#xA3;4m in February 2003, and a further &#xA3;276,000 in May.

The report also notes that in March 2002, the National Council paid

&#xA3;3.657m to training providers for work undertaken in that month and which would normally be reimbursed in the following month.

This had the effect of reducing the cash held in its bank account at the year end and enabled the National Council to avoid breaching the Assembly's 2pc limit on balances that could be carried over to the next financial year.

The NAO concluded that approval for this payment arrangement should have been sought from the Welsh Assembly Government.

Conservative education spokesman David Davies said: "This is a damning indictment. No-one can have confidence any more in Wales' biggest quango. The Education Minister Jane Davidson should have sorted this mess out months ago."

Plaid Cymru shadow education minister Helen Mary Jones said Jane Davdison's management of ELWa had been a "complete shambles". "She's the boss and bosses must answer for their actions when things go wrong on this scales," she said.

'Errors unacceptable'

ELWa last night accepted "serious deficiencies" in the operation of its financial and management control.

The errors were unacceptable and the organisation had been working for many months to strengthen its internal control framework, a statement said.

"It is particularly unfortunate because, as stated in the Auditor General for Wales report, the projects themselves are expanding and improving learning opportunities significantly."

There was &#xA3;3.7m investment into North Wales colleges to bring their information technology and engineering equipment up to industry standards.

"As the Auditor General for Wales report recognises, most of the issues raised were initially identified through the National Council's own internal audit activities and the organisation has worked closely with the National Audit Office," a statement said.

Peter Higson, accounting officer and interim chief executive, will give evidence to the Welsh Assembly audit committee later this month.